CAIA - 30 - Volatility, Correlation, and Dispersion Products Flashcards Preview

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Flashcards in CAIA - 30 - Volatility, Correlation, and Dispersion Products Deck (72)
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1
Q

___ ___are pure plays on volatility with returns that are driven directly by exposure to the volatility factor.

A

Volatility derivatives are pure plays on volatility with returns that are driven directly by exposure to the volatility factor.

2
Q

Investments that tend to decline with increases in return volatility are said to be ___ volatility and have a ___risk premium.

A

Investments that tend to decline with increases in return volatility are said to be short volatility and have a positive risk premium.

3
Q

Studies show that volatility ___ a unique risk factor.

A

Studies show that volatility is a unique risk factor.

4
Q

An options ___ is the length of time until the contract expires

A

An options tenor is the length of time until the contract expires

5
Q

The time decay of options decreases at the ___ ___of ___.

A

The time decay of options decreases at the square root of time.

6
Q

A ___ ___ combines a short call and a short put on the same asset with the same strike price.

A

A short straddle combines a short call and a short put on the same asset with the same strike price.

7
Q

A ___ ___combines a short call and a short put on the same asset, with different strikes.

A

A short strangle combines a short call and a short put on the same asset, with different strikes.

8
Q

At-the-money straddles have ___ market beta.

A

At-the-money straddles have zero market beta.

9
Q

A short ___ ___ involves selling an out-of-the-money bull spread and an out-of-the money bear spread.

A

A short iron condor involves selling an out-of-the-money bull spread and an out-of-the money bear spread.

10
Q

A short ___ ___ involves selling a bull spread and a bear spread with the same middle strike price.

A

A short iron butterfly involves selling a bull spread and a bear spread with the same middle strike price.

11
Q

___ reflects the effects of declines in return volatility of the underlying asset and ___directly reflects the passage of time. These two measures are ___ correlated.

A

Vega reflects the effects of declines in return volatility of the underlying asset and theta directly reflects the passage of time. These two measures are highly correlated.

12
Q

Options with higher vega have ___ gammas and ___thetas. An option with higher vega decays ___each day than one with lower.

A

Options with higher vega have lower gammas and higher thetas. An option with higher vega decays more each day than one with lower.

13
Q

___ risk can be reduced by hedging a call position with a short position in the underlying asset.

A

Delta risk can be reduced by hedging a call position with a short position in the underlying asset.

14
Q

___-neutral hedged option positions are a play on the volatility of the option’s underlying asset.

A

Delta-neutral hedged option positions are a play on the volatility of the option’s underlying asset.

15
Q

Delta-neutral portfolios that are long options are ___ gamma.

A

Delta-neutral portfolios that are long options are long gamma.

16
Q

To keep a long gamma portfolio hedged, traders ___ as the stock price falls and ___as it rises.

A

To keep a long gamma portfolio hedged, traders buy as the stock price falls and sell as it rises.

17
Q

If realized volatility exceeds the initial vega, then positive effects of long ___ dominate the effects of ___and the position experiences a ___.

A

If realized volatility exceeds the initial vega, then positive effects of long gamma dominate the effects of theta and the position experiences a gain.

18
Q

Infrequent rebalancing is a bet that volatility will be ___.

A

Infrequent rebalancing is a bet that volatility will be directional.

19
Q

Realized volatility ___-___, ___and has a ___ ___.

A

Realized volatility mean-reverts, clusters and has a long memory.

20
Q

Volatility is often modeled using ___ ___ ___ ___ and ___ ___ models.

A

Volatility is often modeled using generalized autoregressive conditional heteroscedasticity (GARCH) and regime switching models.

21
Q

An ___ ___ ___ represents several vegas relative to their tenor, moneyness or type.

A

An implied volatility structure represents several vegas relative to their tenor, moneyness or type.

22
Q

A vega structure that focuses on the relationship between vegas and moneyness is a ___ ___.

A

A vega structure that focuses on the relationship between vegas and moneyness is a volatility skew.

23
Q

An option’s ___ ___ is a graphical representation of vega for several options with different expiration dates and strike prices.

A

An option’s volatility surface is a graphical representation of vega for several options with different expiration dates and strike prices.

24
Q

Volatility strategies have recovered from drawdowns in less than ___ year, which contrasts with long-only stocks, credit, or commodity investments that can take ___-___ years.

A

Volatility strategies have recovered from drawdowns in less than 1 year, which contrasts with long-only stocks, credit, or commodity investments that can take 1-2 years.

25
Q

Mean reversion in realized volatility (is/is not) aribtragable.

A

Mean reversion in realized volatility is not aribtragable.

26
Q

A ___ ___is a process that is used to model values that may experience large discrete changes.

A

A jump process is a process that is used to model values that may experience large discrete changes.

27
Q

___ ___is the risk of continuous accrual of small changes in an asset’s volatility over time.

A

Volatility diffusion is the risk of continuous accrual of small changes in an asset’s volatility over time.

28
Q

A ___ ___refers to the risk of large, sudden increases in voalitility.

A

A volatility jump refers to the risk of large, sudden increases in voalitility.

29
Q

Continuous time diffusion process for returns (equation)

A
30
Q

A ___ ___occurs when the observed behavior of a financial series undergoes a significant change.

A

A regime change occurs when the observed behavior of a financial series undergoes a significant change.

31
Q

While quoted yields are used to calculate bond prices, quoted ___ ___ is used to calculate options and volatility swap prices.

A

While quoted yields are used to calculate bond prices, quoted implied volatility is used to calculate options and volatility swap prices.

32
Q

Bond prices and volatility products are both driven by ___-___factors.

A

Bond prices and volatility products are both driven by mean-reverting factors.

33
Q

Volatility and interest rates both have a ___ structure.

A

Volatility and interest rates both have a term structure.

34
Q

___ of volatility and ___of bonds both require compensation for their risk.

A

Sellers of volatility and buyers of bonds both require compensation for their risk.

35
Q

A ___ ___involves a variance buyer making a payment based on a predetermined variance level and receiving an asset’s annual realized variance.

A

A variance swap involves a variance buyer making a payment based on a predetermined variance level and receiving an asset’s annual realized variance.

36
Q

Variance swap payoff (equation)

A

Swap notional value * (Realized variance - strike variance)

37
Q

The ___ ___ ___ is a market-based estimation of the 30-day implied volatility of the S&P 500

A

The CBOE Volatility Index (VIX) is a market-based estimation of the 30-day implied volatility of the S&P 500

38
Q

Calculation of the VIX uses a ___ ___ of S&P options. The variance swap rate is calculated immediately prior to and after ___ days. The VIX is the ___ ___ of the two variance rates.

A

Calculation of the VIX uses a weighted avg of S&P options. The variance swap rate is calculated immediately prior to and after 30 days. The VIX is the square root of the two variance rates.

39
Q

The VIX ___ ___is the geographical representation of the relationship between prices of vix futures contracts and their settlement dates.

A

The VIX term structure is the geographical representation of the relationship between prices of vix futures contracts and their settlement dates.

40
Q

The term structure of the VIX is generally in ___.

A

The term structure of the VIX is generally in contango.

41
Q

A ___ ___ is a derivative contract that transfers the risk between two parties that the average correlation among a set of stocks differs from the swap’s strike correlation.

A

A correlation swap is a derivative contract that transfers the risk between two parties that the average correlation among a set of stocks differs from the swap’s strike correlation.

42
Q

Correlation swap payoff (equation)

A

Swap Notion Value * (Avg Corr - Strike Corr)

43
Q

Empirical research shows that implied correlations tend to be ___ relative to historical correlation.

A

Empirical research shows that implied correlations tend to be overpriced relative to historical correlation.

44
Q

Owning a correlation swap during a crises is typically ___.

A

Owning a correlation swap during a crises is typically profitable.

45
Q

To make a ___ trade, sell the volatility of the index and buy the volatility of the index components.

A

To make a dispersion trade, sell the volatility of the index and buy the volatility of the index components.

46
Q

A ___ spread is a combination of long calls and short calls on the same underlying asset with the same expiration date but different strike prices. It is a type of skew spread.

A

A vertical spread is a combination of long calls and short calls on the same underlying asset with the same expiration date but different strike prices. It is a type of skew spread.

47
Q

A ___ ___is a vertical spread with unequal numbers of long and short option positions.

A

A ratio spread is a vertical spread with unequal numbers of long and short option positions.

48
Q

A ___ vertical spread is created using the same number of long and short positions

A

A pure vertical spread is created using the same number of long and short positions

49
Q

A ___ spread is buying at the money puts and selling out of money puts and benefits if the asset value ___.

A

A bear spread is buying at the money puts and selling out of money puts and benefits if the asset value declines.

50
Q

A ___ spread trade is buying at the money calls and selling out of the money calls and benefits if the underlying asset value ___.

A

A bull spread trade is buying at the money calls and selling out of the money calls and benefits if the underlying asset value increases.

51
Q

___ ___occur because differences between implied volatilities of options with different strike prices. To exploit these differences, a traditional vertical spread strategy ___ OTM options with higher IV than at the money options.

A

Volatility skews occur because differences between implied volatilities of options with different strike prices. To exploit these differences, a traditional vertical spread strategy sells OTM options with higher IV than at the money options.

52
Q

Vertical spreads commonly used in equities with delta hedging involve ___ ATM puts and ___OTM puts.

A

Vertical spreads commonly used in equities with delta hedging involve buying ATM puts and selling OTM puts.

53
Q

A ___ spread trade is a combination of long calls and short calls on the same underlying asset with the same strike but different expiration dates.

A

A horizontal spread trade is a combination of long calls and short calls on the same underlying asset with the same strike but different expiration dates.

54
Q

Horizontal spread trades have ___ exposure to changes in the underlying assets than vertical spread trades.

A

Horizontal spread trades have less exposure to changes in the underlying assets than vertical spread trades.

55
Q

For a horizontal spread trade, if the short-term option IV is expected to increase relative to the long-term option IV, then the strategy ___ the short-term options and ___ the longer-term options.

A

For a horizontal spread trade, if the short-term option IV is expected to increase relative to the long-term option IV, then the strategy buys the short-term options and sells the longer-term options.

56
Q

Payoffs on horizontal spread trades is ___ certain than vertical spread trades.

A

Payoffs on horizontal spread trades is less certain than vertical spread trades.

57
Q

An ___-___ option spread involves a long option position in one asset and a short option position in another asset.

A

An inter-asset option spread involves a long option position in one asset and a short option position in another asset.

58
Q

Inter-asset option spreads are ___ when volatility is high and ___ when volatility is low.

A

Inter-asset option spreads are high when volatility is high and low when volatility is low.

59
Q

___ is an option prices’ sensitivity to a unit change in the underlying asset’s volatility or the option’s IV.

A

Vega is an option prices’ sensitivity to a unit change in the underlying asset’s volatility or the option’s IV.

60
Q

Vega (Equation)

A
61
Q

The ___ ___index is designed to extract the volatility or correlation risk premium.

A

The short volatility index is designed to extract the volatility or correlation risk premium.

62
Q

The ___ ___index is designed to profit during market declines.

A

The long volatility index is designed to profit during market declines.

63
Q

The ___ ___ ___index is designed to capitalize on volatility mispricings.

A

The relative value volatility index is designed to capitalize on volatility mispricings.

64
Q

The ___ ___ ___ index is designed to protect against large broad market declines

A

The tail risk hedge index is designed to protect against large broad market declines

65
Q

Long volatility and tail risk indices are ___ volatile than short volatility or long volatility indices.

A

Long volatility and tail risk indices are more volatile than short volatility or long volatility indices.

66
Q

Relative value, short and long volatility strategies have ___ correlations.

A

Relative value, short and long volatility strategies have low correlations.

67
Q

Relative value volatility strategies have ___ net vega exposure.

A

Relative value volatility strategies have small net vega exposure.

68
Q

Long volatility funds tend to have ___ correlation with tail risk funds.

A

Long volatility funds tend to have high correlation with tail risk funds.

69
Q

Long volatility strategies are ___ aggressive than tail risk strategies.

A

Long volatility strategies are less aggressive than tail risk strategies.

70
Q

Unlike tail risk funds, long volatility funds (do/ do not) have a mandate to provide protection at all times.

A

Unlike tail risk funds, long volatility funds do not have a mandate to provide protection at all times.

71
Q

A ___ ___is defined as an event/occurrence that deviates beyond that which is expected and that is extremely difficult to predict.

A

A black swan is defined as an event/occurrence that deviates beyond that which is expected and that is extremely difficult to predict.

72
Q

Long volatility strategies have a ____ drag on performance due to ____ costs.

A

Long volatility strategies have a large drag on performance due to high costs.

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